HP CEO Dismisses Break-Up Talk

HP will not break itself up and nor depart from its "fix and rebuild" plan that it set for itself in 2012. It will stay on course to set the stage for a return to expansion and greater profitability in 2014, said CEO Meg Whitman in a first quarter 2013 earnings call Thursday.

That means no jettisoning of the PC division or divestment of its enterprise services unit. "We've done what we said we would do in a multi-year journey to set up for recovery and expansion in 2014," Whitman said at the start of the call.

And later, "Overall, our turnaround showed progress in the first quarter. If I had to characterize it, I would say the patient showed some improvement."

Whitman and CFO Cathie Lesjak said HP had made a great effort to bring costs in line with its shrinking lines of business, and that effort was beginning to pay off. Whitman said the restructuring gained traction in the first quarter, which saw HP cut another 3,500 employees off its 300,000-plus total.

The reduction in force was part of HP's ongoing restructuring program. "In addition to the financial results, we are seeing the benefit of a streamlined and more engaged organization translate into crisp execution on the business strategies," she said.

Whitman was putting a brave face on a modest first quarter of 2013. Revenues were down 6% at $28.4 billion for the quarter that ended Jan. 31, compared to the same period last year. Earnings per share were $0.63, down from $0.73 in the prior-year's quarter, using generally accepted accounting principles. That result, however, was above HP's own previous projection of $0.34 to $0.37 per share.

Revenues for HP's troubled personal computer unit, the personal systems division, which news reports at the start of the quarter suggested was being put on the auction block, were down 8% in the first quarter. Units shipped were down 5%. Notebooks were down 14% but desktops up 10%. Whitman addressed the issue of HP's long-term intent by saying, despite rapid changes in consumer device form factors, "this is a business we need to be in" and any discussion of the PC business' sale was off the table.

Printing revenue dropped 5% in the first quarter, with consumer units down 13% and commercial units down 6%. But a greater emphasis on high-end systems raised its operating margin to 16.1%.

The enterprise group, which includes HP's x86 and Itanium servers, saw a 4% drop in revenue year over year for the quarter. The group includes HP's storage and networking products as well. Revenue on x86 servers was down 3%, but Whitman said HP has "stabilized our core server products" and she expects it to resume growth next quarter. Storage revenue was down 13%; within that category, converged storage systems, such as the newly introduced 3Par mid-tier storage product, showed 21% growth in revenue. Technology services revenue was down 1%. Networking revenue was up 4%.

Software revenue, which includes HP's security, network and systems monitoring, and management and automated IT operations, was down 2% year over year for the quarter. License revenue was down 16%, and support revenue was up 11%.

Despite the litany of declines, Whitman maintained a positive tone. "Our primary focus is to deliver on the full-year outlook. I feel good about the rest of the year. We'll be bringing a number of new programs and disruptive innovations to market in the coming quarters," Whitman stated.

In the second quarter, HP will launch its first ARM-based server for the data center, first disclosed in its Project Moonshot announcement in late 2011. Energy-sipping ARM chips are usually reserved for mobile devices, but HP thinks there will be a future market for them in the data center. Most existing x86 and enterprise software can't run on ARM without a migration effort. Nevertheless, ARM servers would use 89% less energy, take up 94% less space and cost 63% less than their x86 equivalents, Whitman claimed.

"If 10 of the top Web service provider companies adopted (the upcoming Moonshot server), they would save $29 million in energy costs, eliminate the emission of one million metric tons of CO2 into the atmosphere. That's the equivalent of taking 180,000 cars off the road," Whitman said. But 10 of the top Web service provider companies would have to include such firms as Amazon.com, Google, Facebook, eBay and Twitter with a large existing investment in x86 infrastructure. They may or may not share HP's enthusiasm for ARM servers.

"We expect the benefits from our restructuring to accelerate through fiscal 2013," she added. HP took $1 billion off its corporate debt during the first quarter, reducing the total to $4.7 billion, Lesjak said.

HP can be expected to make a renewed effort to win more of the consumer electronics market. Its EliteBook Revolve thin notebook with rotating screen won the Best of Consumer Electronics Show in its category earlier this year, Whitman noted.

Revolve sales haven't been aided by the tepid demand for Windows 8, the Revolve's operating system.

HP will also deliver its first ElitePad tablet that runs Google's Chrome operating system later this year, Whitman said.

But projections of what was to come had to be balanced by current difficulties, and Whitman attempted to stay poised on that high wire. "We still face a long road ahead. I don't like the fact that we saw revenue declines in each major segment," she said.

Good point, Lorna. ARM-based servers are interesting for certain applications but it's unclear how popular they'll become, and how quickly. I also don't know that the Moonshot energy savings Whitman cites are much different than what'll be claimed by Dell or others in this space.

I didn't expect the uptick in desktop sales. HP hasn't made much a splash in next-gen personal computing, though. People will be buying desktops for a while, but I'm not sure HP even has a seat at the table when it comes to mobile devices. They're currently working on products for Windows 8, Android, and Chrome OS, so it looks like they're trying to figure it out. But Whitman likes to praise HP's engineers as the "best in the world," and it would be nice to see unqualified proof of that ingenuity.

Sounds like HP's putting most of its eggs in the ARM basket. The State of Servers report we released in November suggests that's a risky bet -- "potential power and cooling savings" came in dead last among eight criteria for the second year in a row, and 67% cited no use of low power (Atom, ARM, etc.) processors. We asked specifically: What is your stance on high-density, low-power micro-servers like those from Calxeda (ARM), Dell (C5000 line) or SeaMicro (Intel Atom)? Just 9% had purchased or were considering vs. 58% not considering or not aware (33% are neutral). HP has its work cut out for it. Lorna Garey, IW Reports

Just because the server market's in the doldrums doesn't mean innovation has ceased. Far from it -- server technology is enjoying the biggest renaissance since the dawn of x86 systems. But the primary driver is now service providers, not enterprises.